Press Room

The dust has now settled after the exciting but turbulent times 2 years ago that saw the chemical giants snapping up pharmaceutical fine chemical specialists for hundreds of millions. Almost 3 billion dollars were invested in three deals alone; the transactions listed in Table 1 add up to more than $14b (includes Gist at $6b and the recent Roche V&FC deal at $2.5). The drivers for outsourcing of APIs remain unchanged, yet the business model adopted by the various players seems to fall clearly into two very different types – with different offerings and different strategies. Yet for all exclusive manufacturing of NCE APIs remains a roller-coaster: approvals carry high rewards, product cancellations and withdrawals mean significant disappointments. The notable new entrants are the integrated chemical giants that have acquired or invested in GMP businesses (some of the businesses that got acquired were great brands: Archimica, ChiRex, Finorga, Gist-brocades, Laporte, Profarmaco, Raylo, Torcan…). Their original strategy was to bet on size and enter a high-margin non-cyclical business that had synergies with their existing businesses. Some articles emphasized that the acquisition of API capabilities was strategically aimed at giving them total control over the key building blocks, which could be sourced internally. BASF advertised with the slogan: "Backward integration is another form of forward thinking". On the other hand the traditional players have remained independent and have taken no part in the M&A frenzy (FIS, Hovione, Lonza, Omnichem, Orgamol, Siegfried, Sumika). In fact, they all probably see M&A as a strength-diluting exercise, as it debilitates one of their strongest asset, namely: their company culture. Their growth, which is consistently in double digits for the past 10 years, remains purely organic – and they enjoy a stable ownership, Table 2. The independents strongly disagree with the assumptions which formed the strategies of the new entrants: Why should size matter ? when most APIs are only a few tens of tons when there is a trend to more highly-active compounds when an API producer should be a generalist -able to do all technologies- and not the lowest-cost technology specialist when the early phase clinical materials requires service, service, and more service, which traditionally is not a characteristic of large, multi-site companies   Backward integrating only adds to an already risky business; whereas the Independents have the whole world -including India and China- to source low cost raw-materials.   Buying sites from Large Pharma with supply agreements often resulted in: a low-margin business, a single-customer dependence, an old plant, which was often not multi-purpose and certainly not designed for quick change-over and evolving compliance standards. Furthermore with their expansion into the API business the chemical giants risk antagonizing their traditional customers who now could perceive them as competitors and no longer as supplier/partners. As an example, Hovione would prefer to discuss its new catalyst needs with Engelhard rather than Degussa or Johnson Matthey, who are now perceived to be competitors. Neither the analysts, the board members nor the shareholders considered any of these matters – but management thought they saw opportunities for making a difference in their shareholder value and the stock-market supported them wholeheartedly. In our view the winning model appears to be a company big enough to: have the critical mass that will support the diversified portfolio necessary to mitigate risk support a large process chemistry group able to develop several dozen simultaneous projects have the depth and breath of know-how and technology that is necessary to support multiple process validation campaigns per year assure long-term capacity. And yet a company small enough to: take decisions and communicate them quickly provide extreme levels of service, flexibility and transparency We believe the entrepreneurial, single-minded company without share-price concerns or peripheral activities to serve as distractions is likely to be a step ahead of the competition. The constant need for large amounts of capital investment, the many years that projects take to mature from development phase to commercial scale, and the inherent risk of each project makes our business unfriendly to the stock-market. Therefore it should be no surprise that the key players have a reference shareholder able to look at the longer-term: whether it be Ajinomoto, a family or a foundation. Over the last 12 months Hovione’s normal growth has been further enhanced by: Satisfied customers that bring us repeat business Projects that have moved beyond validation to commercial phase Customers with projects in Phase III who are looking for a more reliable long-term supplier or for further capacity Our experience indicate that Phase III projects change suppliers because: They want a stable supplier for the long term, “one that does not shop itself around constantly” They want assurance of capacity and of compliance – and are fed up of “getting a different color batch every time” They want to be “in-the-loop”, and not be the last ones to know of problems or of process changes The key-buying factors for our customers seem to include: a company capable developing robust processes based on sound science that deliver “right-first-time, every time”, shareholders who are committed for the long-term and a track-record of rock-solid delivery as well as open and honest communications. Some European companies have continued to invest at a time when others are trying to sell. Orgamol is building a new pilot plant and synthesis unit in Switzerland, Siegfried has innovated dramatically in the GMP design of its own new facility. Rohner has started-up a new cGMP multipurpose plant. Hovione has just commissioned its new Technology Transfer Centre in New Jersey, USA. This is an investment in a green-field site with kilo-lab and pilot-plant facilities within a short drive of the largest cluster of API customers in the World. In the past few years exclusive manufacturing as an industry has been the object of far too much interest, and too many bets were placed with exaggerated expectations –and most are not pleased with their investments. The business however exists, the market continues to grow but it is just not as simple as many companies expected it to be. Fines for non-compliance of GMPs have reached a record $0.5b, and FDA’s most recent initiative “Pharmaceutical cGMPs for the 21st Century” are but two examples that indicate that the scope for differentiation has increased yet again; and that the role of a professional independent manufacturer of APIs has never been more relevant. Guy Villax Chief Executive Hovione Loures, 11th September 2002   Article published at Show Daily for CPhI 2002

Article

Outsourcing: The dust has now settled

Sep 10, 2002

Article published in the Informex Show Times Newsletter   Pharma Fine Chemicals - Nothing's changed! Since the summer there has been an avalanche of gloom in the industry magazines. Many articles reporting how much everything had changed since the last year; how fine chemicals are suffering by over-investment, by over-capacity, by a downturn in the cycle etc.. etc.. The reality is many companies made bets that the market perceived then as being excellent ones, but hindsight now tells us that too much optimism about the fine chemicals sector drove acquisitions and investment in plant expansion by companies inexperienced in the sector. The tough part is, though many are now hurting, the misunderstandings seem to persist: 1. "We are in a down-turn in the cycle". In pharma API there is no cycle - indeed some trends are up (more projects are coming out of the Biotech sector) others are down (more advanced stage projects are cancelled, more drugs have been withdrawn, pressures for better plant utilization at the merged large pharma drives less outsourcing) ) but overall they probably cancel each other out - the amount of work out there is still increasing and is finding outsourcing homes. It is probably now in smaller parcels, bought by more experienced decision-makers and there is certainly more competition. The only cycle at Hovione is the winter when more antibiotics are sold because of the US flu season. 2. "The complete tool box". Every company out there seems to agonize about the technologies they do not have. In making APIs you do not need to be a cost leader and a specialist in everything, you need to be a sound generalist able to address all the technologies, whether chemistry, engineering, analytical, etc... Technologies are therefore not a differentiator; if you are not a generalist, you are out of pharma APIs anyway. In the past 40 years Hovione has addressed every chemical reaction that has come its way, successfully. We have however some policy decisions such as: We do not use cyanides or other dangerous poisons and do not work with betalactams, penicilins or cephalosporins. 3. "Building a $500m business in 5 years". The wishful thinkers blame the failure of their plans on market changes. In fact nothing has changed: the $300b Pharma sales worldwide are still made up by about 4000 different APIs, 95% of the medicines in the pharmacy have sales of

Article
Informex Show Times Newsletter, 27 February 2002

Pharma Fine Chemicals - Nothing's changed!

Feb 27, 2002

Dear Friends, When the organisers of CPhI asked us to write an article about Hovione for the CPhI Show Daily, we accepted but the words that follow are probably not what they expected. Last year we were basking in the sun-shine, it had been a golden time for the fine chemicals industry. The El-dorado was nigh, everyone was investing, the brave ones were buying plants, and some, driven by consultants were spending hundreds of millions of dollars on merging and acquiring other companies. The folly of the stock-market still had everyone in a frenzy. Life seemed sweet, easy and money was plentiful. The bankers in their excitement even decided that those making fine chemicals for the Pharma industry deserved some attention, they organised conferences and issued reports. What a difference 12 months make. We are now in a recession, and the atrocities of September 11th are fresh in our minds. Everywhere one looks, it seems the colours have gone and the World is now in black and white. The articles one reads in the industry magazines talk of over-capacity, slowing growth, withdrawn drugs, unapprovable letters, cancelled projects. In some cases, the extent of the excess-enthusiasm was even given a number: a CHF1.3 billion goodwill charge on acquisition. The fascination with our business will now wane and the wave of interest will go elsewhere. Quite a few of us will remain behind to pick the pieces left behind by this storm, tidy up the house and get it to move forwards. It will take a couple of years to get things back into balance, for the new-comers to find their direction, to establish with clarity who is a quality competitor and who has remained a trusted supplier. Those that expected to grow an API business in 4 or 5 years to $500 million in annual sales will be disappointed; those that have been at it for decades, focusing on compliance and excellence will continue to deliver work that satisfies customers. It is the repeat customer that drives growth; track record is not just the absence of recalls and warning letters, it is also the ability to consistently find solutions for customer problems - and in drug development there are plenty of tough surprises to solve. Being in compliant manufacture is not just a question of dollars; being "cGMP" is not just a question of investment in new facilities. It needs time more than money, it requires having a team of dedicated technical people with many years of accumulated training. You do not "go fast" because of more resources or tougher deadlines; projects move fast well because your technical groups are trained and have done it together many times before, your people are aligned, and the range of skills is well covered and well balanced. Can a confederation of a dozen plants acquired through multiple mergers ever have a common culture, a same view of safety, let alone of quality? How do you manage all the site managers competing for the new project? Being successful in compliant manufacture is tough, it comes with years of nurturing and focus. Is it a surprise that the smaller independent companies do it better than the large giants ? The divide is often the time-scale - some squeeze their people and business partners for their quarterly results, the annual budget takes precedence over customer satisfaction, available capacity is a dreaded cost - others look at available capacity as a positive thing enabling prompt service, and focus on what is in their control: sales in 2003 and 2004 (indeed the sales for the next 2 years were decided some time ago...). The divide is often the choice of target: large companies look at sales and profits, they look at the share price and at how to cut costs, performance is judged on dividends. This is not so for all: some of us are motivated by customers that say thank you, some even compete for, and win, environment awards, but those that succeed, work as partners with their customers to develop new drugs; if they were lucky they started working together 5 year ago for the first 10 kilos; if they are statistically normal, they will have worked together on two failed projects well before they can claim to have put a new drug on the market. Our industry is about saving lives. Though on occasion we are seen as polluters carrying out unsafe operations, and sadly accidents do occur, as in Toulouse only last week. Odd how energetic reactions, deadly reactants, explosives, corrosives and flammables all come together to make pills that cure disease, kill bacteria and destroy viruses. Safety First is not a negotiable item, chemistry and its engineering need competence and have priorities that business pressures must not be allowed to interfere with. Success in this business needs great leadership, the decisions are not easy - Bayer reminded us all how tough it can get. At Hovione we did not participate in the Technicolor storm of the past few years. We had approved a medium term plan in 1994 and executed it with success; in 2000 we approved another medium term plan and we are taking it forward unchanged. It involved buying a field near Princeton to build a kilo lab and pilot plant to support early phase customers in the USA and to assist in the technology transfer to our larger plants when the projects so warrant it. The plan also aims to build additional capacity in our areas of strength: process chemistry, GMP manufacture, injectable grade APIs and corticosteroids. Some of this expansion is taking place in our plant in the Far East which is not encumbered with EINECS costs and speed limitations that slow the pace of drug discovery. The companies that meet at CPhI play a critical role in the world economy. We are a key link in the worldwide health care system - without us the pharmacies would be empty. Ours is an important job, one we can be proud of. It is important that we should move ahead and get on with our business with professionalism, and keep distractions to a minimum. Guy Villax Chief Executive - Hovione

Article
Show Daily CPhI, 9 October 2001

Article published in the CPhI Show Daily Newsletter

Oct 09, 2001

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